PARALLEL ECONOMY & ITS IMPACT ON IBE

INDIAN BUSINESS ENVIORMENT SOURAV DAS 11/MBA/36

DEFINITIONFeige defines the hidden economy as including those economic activities which go unreported or are unmeasured by the societys current techniques for monitoring economic activity.Thus feiges definition is broad and describes the parallel economy in terms of behavioral characteristics embracing those activies which are excluded from GDP by convention as well as those which elude the measurement process.Schneider and Enste define the parallel economy as all economic activities which contribute to the officially calculated GNP.This definition adopts a narrower view and considers parallel economy as simply unrecorded income.Both the broad and narrow approaches divide the parallel economy into four comparable cpmponents: the criminal,irregular,household & informal sectors.while the lasr two consists of economic activities which are excluded from GDP by definition,the former two constitute of economic activities which are embraced by current definations of measureable economic activity but which are not captured by current measurement techniques.The first two under underground economy & the last two under informal economy. Having successfully attempted a workable definition of parallel economy, let us try to investigate into the causes that lead to its origination. The most important cause of parallel economy is undoubtedly high taxes which create obvious incentives to get off-the-book income (My fathers principal reason for the kutcha transactions was taxes too). The other significant cause is the burden imposed by government regulations and restrictions. If one scans the economic literature on the subject, there is an over emphasis attached to the above two factors as the ones leading to the growth of hidden economy. It is no doubt that high tax rates and pervasive regulation provide the incentive for hidden activity, but the opportunity to actualize such incentive depends upon other factors such as level of development, social structures, public acceptance of compliance (or tax morality), etc. Thus focusing on the two factors alone is likely to produce neither complete diagnosis nor appropriate prescription

Size of the parallel economy As mentioned earlier, there is an abundance of literature available upon measurement techniques and about estimates of parallel economy. This may make the job of commenting about the size of parallel economy seem easier than it actually is. There arise a number of difficulties starting from choosing the correct method. A variety of methods have been used and the different methods appear to generate widely divergent estimates. Such macro economic heterogeneity leaves one wary about the reliability of the estimates leading to some believing these estimates as representing measurement without theory and relying upon heroic assumptions to justify the manipulation of certain numbers Further, most of the measurement efforts have been directed towards measuring in (Carters words) the Underground Economy rather than the Informal Economy to that extent they represent only partial measures of the parallel economy. While an elaborate description of each of the measurement techniques is beyond the scope of the paper, attempt has been made to give the broad categories under which such techniques can be classified. There are about four specific measurement approaches which need mention Monetary Approaches: These are methods based upon the utilization of monetary data to analyze the development of monetary variables and to infer that the anomalies noted in the behavior of these variables is due to the parallel economy. Labor Market Methods: These are direct approaches based on surveys of real or potential agents of the hidden economy. Accounting Methods: These methods are used by national accountants to make up for the gap between the GDP - point of view expense and the GDP point of view income. Compound Methods: In these methods, all the factors that contribute to the explanation of the parallel economy are simultaneously considered while estimating the parallel economy. Frey and Wecks work would fall under this category.

Parallel economy in India Parallel economy connotes the functioning of an unsanctioned sector in the economy whose objectives run parallel, rather in contradiction with the aroused social objectives. This is variously termed as black economy, unaccounted economy, illegal economy, subterranean economy, unsanctioned economy or 'hidden economy'. A hidden economy in its broadest sense may consist of - a) illegal economy, such as money laundering, smuggling, etc; b) unreported economy including tax evasion; c) unregulated economy, ie economic activities outside regulations. The money laundering is a lack of transparency standards in bilateral and multilateral trade with flourishing offshore banking in tax havens has allowed it to grow unabated in past couple of decades. Experts estimate that around 50 per cent of GDPor about Rs 33 lakh crore of black moneyis generated every year through corruption at various levels. While black money which operates within the country can be productive, what goes overseas is seen as non-productive. Impact of Black Money The circulation of black money has adversely affected the Indian economy in several ways. 1. It leads to the misdirection of precious national resources. 2. It has enormously worsened the income-distribution. The fixed income salary class finds itself ever be the lower rung of the income-ladder as they pay taxes. They are not able to catch up with the people in business, or in professions, or many of those employed who make money by black activities. Many high placed official and honest employees earn much less than an average small shopkeeper in big cities like Bombay and Delhi. 3. The existence of a big-sized unreported segment of the econom is a- big handicap in making a correct analysis and formulation of right policies for it. 4. Black money results in transfer of funds from India to foreign countries through clandestine channels. Such transfers are made possible by violations exchange regulations through the device of under invoicing of exports and over-invoicing of imports etc. 5. Black money requires for its protection, proliferation and expansion of a service organisation composed of musclemen, touts and brokers to combat the forces of law and order on the one hand and on the other hand, there are income tax advisers, or chartered accountants in the pay of black money

operators. There are contact men, liaison officers, dalals who negotiate favors from top bureaucracy and political bosses through bribes of black money. 6. Black money has corrupted our political system in a most vicious manner. At various levels, MLAs, MPs, Ministers, party functionaries openly go on collecting funds for party or elections. Ministers dole out favours of crores by accepting black money donations of a few lakhs from businessmen National policies are, therefore, being bent in favour of the big business under the pressure of black money. 7. Causes inflations The politics of black money thus has corroded the moral fibre of Indian polity. Ministers dole out favours of crores by accepting black money donations of a few lakhs from businessmen. National policies are, therefore, being bent in favour of the big business under the pressure of black money. Due to the pernicious impact of black money on the Indian economy and polity that the Wanchoo Committee concluded: It is, therefore, no exaggeration to say that black money is like a cancerous growth in the countrys economy which, if not checked in time, is sure to lead to its ruination. Survey on Bribery and Corruption India lost a staggering $462 billion in illicit financial flows due to tax evasion, crime and corruption post-Independence, according to a report released by Washington-based Global Financial Integrity. The document on the "Survey on Bribery and Corruption" was released at the first annual fraud conference organized by the Association of Certified Fraud Examiners here on June 21, 2011. The report stated that 68% of India's aggregate illicit capital loss occurred after India's economic reforms in 1991, indicating that deregulation and trade liberalization actually contributed to or accelerated the transfer of illicit money abroad. Reports that wealth is stashed in offshore destinations and tax havens also goes to indicate the extent of the problem, the report said. The KPMG India Fraud Survey 2010 suggested that today India is faced with a different kind of challenge. It is not about petty bribes, popularly known as 'bakshish' anymore, but scams to the tune of thousands of crores that highlight political and industry nexus which if not checked could have far reaching impact on the economy. India has been facing governance challenges from within at various levels for a long time. "Rigid bureaucracy, complex laws and long-drawn judicial process deter people from considering legal

recourse in corruption cases. India has around 35 million court cases pending. Besides lack of manpower and poor infrastructure facilities, other factors hindering the anti-corruption drive include lack of teeth in the legal framework," the study said. "A large number of respondents stated that organizations pay bribes to win and retain businesses. This is a typical scenario where organizations tend to overlook the implications of encouraging these practices and often look only at short term benefits achieved. They fail to realize that what has worked in their favour could also land into trouble later and lead to adverse consenquances for them," the report said. The study noted that another key area where business is impacted is in the area of mergers and acquisitions. "Nearly 37% respondents opined that the corruption could impact the valuation of a company thereby denying shareholders of a fair price. Moreover, it could also make it difficult for them to find a suitable business partner, thereby seriously impacting the growth prospects of the business," the study said. Ugly faces of black money and corruption The appropriation of public and national wealth through bribes and black money is the third facet of corruption. 2010 was the year of scams 2G Spectrum, Commonwealth Games, Adarsh Housing Society etc. 2011 has emerged as the year of the fight against corruption with social activist Anna Hazares fast for a Lokpal Bill and Baba Ramdevs fast to bring back black money stashed away in foreign banks. Forceful capture of land - 20 police battalions were being used to crush the anti-Posco movement in Odisha and destroy the betel-vine gardens that are the basis of peoples prosperous living economy, earning small farmers Rs 400,000 per acre. The ecology movements and tribal and farmers movements are fighting against the corruption involved in themassive resource grab and land grab taking place across the country for the mining of bauxite, coal and iron ore, for mega steel plants and power plants, for super highways and luxury townships. Farmers fighting the land grab along the Yamuna Expressway were killed on May 7. While they received a mere Rs 300 per sq. m. for their land the developers who grab the land in partnership with government using the 1894 colonial land acquisition law sell it for Rs 600,000 per sq. m. This is corporate corruption.

Farmhouses of farmers are burnt and destroyed to create farmhouses for the rich. Farms are destroyed to create Formula 1 race tracks and swimming pools for the elite. This obscene, violent, unjust land grab is the cruellest face of corruption in todays India. Parallel economy booms The black money issue has angered the masses as various groups have put out staggering numbers to highlight the extent of the problem. Despite several studies since the early Fifties, the exact estimate of the black economy and black money has remained elusive. Against this backdrop, the government has been forced to commission a study by three top economic thinks tanks to get an estimate on the size of the black economy. The study is expected to be over by September 2012 and provide fresh insights. What Civil Society Wants about black money 1: Ordinance to declare black money a national asset with powers to seize as well as confiscate, be it at home or overseas 2: Disclose the identity of those with loot stashed abroad 3: Life sentence or capital punishment for those found guilty 4: Join global efforts to combat drug and terror funding 5: Enact legislation so as to make property transactions transparent 6: State funding of elections, right from national to state, municipal and panchayat